Image © Andrey Popov, Adobe Stock

- GBP/USD is coiling into apex of two trendlines

- Could signal volatility ahead

- Confirmation from move below 1.3000 and above 1.3200 (for bulls)

The Pound-to-Dollar exchange rate is getting squeezed into a narrowing apex created by the convergence of two major trendlines, according to Richard Perry, a market analyst at Hantec Markets.

This sort of market action often precedes the onset of high volatility once the market breaks out. The phenomenon can be seen quite clearly on the chart below:

“There is now just 60 pips between the five-week downtrend and four-month uptrend. And still, the market has not broken either. Even though the Average True Range continues to plummet (now just 94 pips with the mean of the past 12 months being c. 110 pips),” says Perry.

Yesterday the exchange rate was bullishly inclined - pushing up against the descending (red) trendline. Perry suggested this gave “the slightest hint of a move higher threatening” in his analysis. In the end, however, the market failed to breakout and continued being backed into the corner of the apex.

Today (Wednesday) the opposite is true and GBP/USD is probing the lower trendline.

Perry thinks the market will break out of the ‘straight jacket’ by Thursday, April 18. Yet he is reluctant to call an eventual direction for the move or to suggest it will be strongly indicative of an overall longer-term trend.

“A breach will still not likely be a directional move, just continued consolidation. Yesterday’s negative candle put a pin in any positive bias and momentum indicators are stagnant,” says the market analyst.

The market would have to break below a major level such as 1.3000 or above 1.3200, says Perry, before a stronger directional trending move would be expected to gain traction.

“We still look for a decisive move to come from a closing breach of support at $1.3000 or resistance at $1.3200. Initial support is at $1.3030, with resistance at $1.3120/30. Conviction is sadly lacking here now,” says Perry.

Perry’s view is similar to our own overall wait-and-see stance, only we place the confirmation bar for more upside or downside wider apart than Perry.

We would want to see a break the 1.3380 March 13 highs for confirmation for an extension up to a target at 1.3550, which is a strong resistance level made up of a combination of both the 200-week MA and the R2 monthly pivot. The pivot is a level used by traders to assess the strength of the trend, and a strong support and resistance level in itself.

Alternatively, a break below 1.2925 - the range lows and the 200-day MA underpinning those lows - would signal a deeper bearish breakdown to a potential downside target at 1.2780 and the February lows, or even 1.2700 at the level of the S2 monthly pivot.

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